By Roger J Kerr
The strengthening of the AUD to $1.0400 against the USD has propelled the Kiwi towards the 0.7700 resistance level.
The Aussie dollar has certainly been the stand-out star performer in global currency markets over this last week. It is worth examining the forces behind the aggressive AUD buying and whether the gains are sustainable.
Where the AUD goes, the Kiwi is following; therefore both local importers and exporters will be wondering whether this dramatic reversal to 0.7700 from below 0.7200 only two weeks is going to continue.
There has not been any particular piece of economic news out of Australia to change the RBA stable interest rate outlook, therefore the Aussie currency is being driven by other factors:
- Reducing concerns that Chinese monetary tightening will hurt demand and prices for metal/mining commodities that Australia produces and sells to China.
- Global fund managers and hedge funds pulling money out of Emerging Markets investment assets this year and re-weighting to currencies/economies like Australia and Canada.
- Chinese and other Asian acquisitions of Australian resources companies causing a one-sided demand to buy AUD’s. These capital inflows into Australia are significant and much larger than any capital outflows on any given day.
- Global investor risk appetite is up and 'carry-trades' are back on the agenda - well, they were last week anyway.
Watch for the minutes of the 15 March US Fed Reserve meeting later this week to perhaps take the gloss off the AUD as the financial/investment markets contemplate rising US interest rates later this year. Commodities (and commodity currencies) may not be so bullish when the 'carry-cost' (US short-term interest rates) of holding commodity inventories is no longer close to zero.
Two interesting lead-indicators for the AUD/USD rate in the past have been the JPY/USD exchange rate and the copper price.
The charts below depict clear divergence of these correlations as the AUD races away.
History tells us the AUD currency value is well over-cooked at these levels.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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